Skip to main content
Pearson+ LogoPearson+ Logo
Start typing, then use the up and down arrows to select an option from the list.

Financial Statement Effects of Inventory Costing Methods:Falling Prices

Brian Krogol
Was this helpful?
Alright let's continue with the falling price environment. So if we're talking about Fife oh in a falling price environment. Well let's say again that we sell three shipments right? If we're gonna sell three shipments in Fife oh well we're gonna sell the first shipments right? So we're gonna sell these three shipments in Fife oh and those would go to cost of good soul and then this last shipment would end up in our ending inventory. Right? Same thing with life. Oh right let's think about life. Oh now if Life oh was gonna sell three shipments, Well they sell the last shipments right? So they're gonna sell these three shipments so the smaller values are going to cost a good sold and the big value is left in ending inventory. Okay so let's go ahead and summarize this information into our falling price environment box up here. Okay so let's first think about cost cost of goods sold. Which one's gonna be higher is Fife o or Life Oh gonna have a higher cost of goods sold in this falling price environment. So it makes sense that FIFA does to write because prices are falling but we're selling the old expensive units. So FIFA is gonna have higher cost of goods sold in this situation and life. Oh lower. So based on that same logic that we talked about gross profit. If cogs cogs is an expense and it's a higher expense. Well that's gonna bring our profit down right? When the expense goes up we have a lower profit. So this will have a lower profit and this by the same logic has a higher profit and gross profit. And net income go hand in hand if we're gonna have a lower gross profit. Well that's gonna end up as a lower net income and the vice versa here for fight for life. Oh last but not least is our ending inventory. So think about the ending inventory. Well in in uh Fife oh we see that they're left with just a small balance where life, oh has the big balance left? Right? So this one's gonna be lower and this one will be higher. Alright so notice it's pretty much just the opposite of what we had up here, right in the rising price environment. Cool. One last little note here behind me. Is that companies reporting in life? Oh so if you're gonna use life? Oh um it's a requirement that you also show what would have happened under Fife. Oh okay. So you use what's called a life, oh reserve to help you transfer from life? Oh to Fife. Oh again this this is gonna be beyond the scope of this class, You're probably not going to have to do anything with the life of reserve. But it's just a good thing to note that uh there's requirements to show what your inventory would have been like in Fife. Oh okay and that just helps comparability across companies. All right. Cool, so let's go ahead and pause here and we'll move on to the next video